Valuation of Fair Market Value of Shares under FEMA Regulations
As per RBI guidelines the fair value of equity shares, compulsory convertible capital instruments or any other capital instruments of an Indian Company, in case of allotment or transfer to or from Non-Resident must be carried out in accordance with any internationally accepted valuation methodologies. The valuation shall be duly certified by a Chartered Accountant or SEBI Registered Category I merchant banker, where the shares or the capital instrument are not listed on any recognized stock exchange in India.
Major Types of the Transactions:
Major transactions which can be carried out with Non-Residents are listed below:
1. Transfer / Allotment by a company to a person resident outside India
2. Transfer / Allotment by a person resident in India to a person resident outside India
3. Transfer / Allotment by a person resident outside India to a person resident in India
4. Swap of capital instruments
5. Subscription to Memorandum of Association
6. Investment in an LLP
Pricing / Valuation Guidelines:
The Pricing / Valuation Guidelines are governed by The Foreign Exchange Management Act, 1999 (FEMA), Foreign Exchange Management (Transfer or Issue of Security by a Person resident Outside India) Regulations, 2017 and RBI notification & regulations issued and updated on time to time.
The final crux of the Pricing / Valuation Guidelines is summarized hereunder:
1. Issue by an Indian company or transferred from a resident to non-resident – Price should not be less than
a. Listed Company – The price worked out in accordance with the relevant SEBI guidelines
b. Unlisted Company – The fair value worked out as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant.
2. Transfer from a non-resident to resident – Price should not be more than
a. Listed Company – The price worked out in accordance with the relevant SEBI guidelines
b. Unlisted Company – The fair value as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.
3. Overseas Direct Investment (ODI) Transactions – Where the investment in any foreign company is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI or an Investment Banker / Merchant Banker outside India registered with the appropriate regulatory authority in the host country; and, in all other cases by a Chartered Accountant or a Certified Public Accountant.
4. Swap of Capital Instruments – In case of swap of capital instruments, irrespective of the amount, valuation will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country
Valuation Methodologies:
For Listed Companies: The listed companies valuation & pricing methods are driven by the guidelines issued by SEBI.
For Unlisted Companies: The transfer or allotment of equity shares or any other capital instruments are regulated as per Pricing / Valuation Guidelines as mentioned above. The transfer or allotment shall be done at fair value which should be valued as per any internationally accepted pricing methodology.
Internationally accepted pricing methodology mainly implies the Discounted Cash Flow (DCF) Methodology. DCF method for valuation of unlisted companies takes into account the future financial projections, a well research discounting rate, all the macro & micro economy risks and other industry norms. Other methods can also be applied by giving appropriate weights to each such method.
Role of Registered Valuer:
The Valuation of Shares and Securities is now regulated under section 247 of the Companies Act 2013, where valuation reports to be obtained from registered valuer only. The valuer must be registered with IBBI. The registered valuer values the transactions and companies based on the internationally accepted valuation methodologies.
About the Author: Mr. Aditya Chokhra is a Chartered Accountants by profession having more than 13 years of experience in the field of Financial Management, Valuation of Companies, Financial Modelling, Project Finance etc. He is also an IBBI Registered Valuer for Securities or Financial Assets.
Disclaimer: Absolute Care has been taken while preparing this article, however inadvertently if any error occurs then the Author shall not be held responsible for such cause. The content published is only for educational purpose ad shall not be construed as rendering of any professional advise in any manner whatsoever. The readers must exercise their own judgement and refer the original source before any implementation. Further the content is an original work of the author and may be used only after written permission.